An Individual Savings Account (ISA) is a tax-efficient way to save and invest your money. It allows you to earn interest or investment returns without having to pay income tax or capital gains tax on your earnings. There are different types of ISAs available, each with its own rules and limits.
You can have more than one ISA at the same time, but there are annual limits on the amount you can contribute to them. As of the 2024/25 tax year, starting on 6 April 2024, the annual ISA allowance is £20,000, which means that you can invest up to £20,000 across all your ISAs in the same tax year. The ISA allowance is subject to change, so it’s important to stay up to date with any updates.
The restrictions about how many ISAs an investor can open in a tax year are changing from 6 April 2024. The new rules allow investors to open multiple ISAs of the same type — with the exception of a Lifetime ISA — within the tax year, removing the previous rules about only opening one ISA of each type per year. Though it’s worth remembering that the total amount that can be paid across all ISAs is still the same at £20,000 per year.
Types of ISAs
There are several types of ISAs available in the UK: Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, Lifetime ISAs. Some people may still hold a Help to Buy ISAs but you cannot get a new one (more on this later) and a Junior ISA. In theory, with the new rules you could open several ISAs each and every year and could end up with many ISAs in the long run!
Cash ISAs
Cash ISAs are a type of savings account that pays interest tax-free. Cash ISAs usually include savings into some form of bank or building society account. Like these accounts there are several types available including fixed rate or easy access.
Stocks and Shares ISAs
Stocks and Shares ISAs are a type of investment account that allows you to invest in stocks, shares, and other investment products such as investment funds, unit trusts and corporate or government bonds.
Innovative Finance ISAs
Innovative Finance ISAs (IFISAs) are a type of investment account that allows you to invest in peer-to-peer (P2P) loans and crowdfunding projects.
While IFISAs can potentially offer higher returns than other ISAs, the risks involved are also higher. The loans made through P2P lending platforms or crowdfunding platforms are typically unsecured, which means there is no collateral to recover in case of default by the borrower.
In addition to the credit risk, investors in IFISAs may also face platform risk, which refers to the risk of the P2P lending or crowdfunding platform itself going out of business or failing to perform as expected. If this were to happen, investors may not receive the expected returns, and their initial investment may be at risk.
It’s also worth noting that IFISAs are not covered by the Financial Services Compensation Scheme (FSCS), which means that if the P2P lending or crowdfunding platform goes bankrupt, investors may not be able to recover their investment.
Lifetime ISAs
Lifetime ISAs (LISA) are a type of savings account that allows you to save for a first home or retirement. You must be between 18 and 40 to open a Lifetime ISA and the maximum you can contribute each tax year is £4,000, until you are 50.
When you reach 50, you cannot pay in anymore, but you can continue to earn interest or investment returns.
One of the main advantages of a LISA is that the government will contribute a bonus of 25% on top of the amount saved, up to a maximum of £1,000 per year. This means that if you save the maximum of £4,000 in a year, you’ll receive a bonus of £1,000 from the government. The bonuses also stop at age 50.
There are some down sides through. If you withdraw money from a LISA before the age of 60 and not for the purpose of buying your first home, you’ll have to pay a penalty of 25% of the amount withdrawn.
It’s important to keep in mind that using a LISA to buy a property is subject to some conditions. For example, the property must be in the UK, and you must be a first-time buyer. You must use a conveyancer or solicitor to act on your behalf in the purchase, and you are buying with a mortgage. The final limitation is that the maximum price of a property you can buy with a LISA is £450,000.
Help to Buy ISAs
Help to Buy ISAs were available until November 2019, and were replaced by the Lifetime ISA. If you already have a Help to Buy ISA, you can keep it and contribute to it until November 2029. You can only have one Help to Buy ISA and the maximum you can contribute each tax year is £2,400. The government will provide a 25% bonus on your savings, up to a maximum of £3,000 when you purchase your first home.
Summary
In summary, you can have multiple ISAs at the same time, but you can only contribute up to the annual ISA allowance of £20,000 across all your ISAs in a tax year*. The rules are changing about how many ISAs an investor can open in a tax year are changing from 6 April 2024. The new rules allow investors to open multiple ISAs of the same type — with the exception of a Lifetime ISA — within the tax year.
Thinking of opening an ISA? Our calculators can help you find the right home for your money. If you like the idea of picking and choosing your own investments, then an ISA on a DIY platform might be for you. Use our comparison tool to help you find the right platform. Most have recommended fund lists too.
If the idea of picking your own investments fills you with dread, then a robo or digital investment provider might be the right home for your ISA. They ask you lots of questions about your attitude to risk and your investment goals and then recommend a solution. Use our robo comparison tool to find the right one for you.
*This does not include Junior ISAs which have an annual allowance of £9,000 in the current tax year.
Photo by Nathan Dumlao on Unsplash
